U.S. GDP up 2.2% in third quarter, revised lower

Consumer spending leads way to first quarter of growth in a year

WASHINGTON (MarketWatch) -- The U.S. economy grew at the fastest pace in two years during the third quarter, but the revised annual growth rate of 2.2% was much slower than what the government initially reported.

U.S. real gross domestic product increased for the first time since the spring of 2008, boosted by higher consumer spending -- especially on autos -- as well as a rebound in investments in homes, a slower pace of inventory reduction, more exports, and robust government spending, the Commerce Department said Tuesday.

Before growing in the June-through-September quarter, the U.S. economy had shrunk for four straight quarters -- the first time it had done so since the Great Depression.

The economy contracted 0.7% in the second quarter after having plunged by 6.4% in the first quarter and by 5.4% in the fourth quarter of 2008. The figures are seasonally adjusted and adjusted for price changes.

Most economists believe the worst recession in generations ended during the third quarter, even as the nation's unemployment rose. Production and sales increased, while real incomes slipped lower.

Consumer spending, boosted by the government's so-called cash-for-clunkers program, was the main engine of growth in the third quarter.

Home building contributed to growth for the first time in nearly four years.

Business investment declined as a small increase in capital spending on equipment and software was overwhelmed by another large drop in investments in structures.

Foreign trade subtracted from U.S. growth in the quarter, as a big jump in exports was offset by an even larger rise in imports.

Third-quarter GDP was originally estimated two months ago at a 3.5% annualized rate but was revised down to 2.8% growth in last month's estimate. The revisions come from more complete data than was available at the first and second estimates.

The 2.2% revised growth rate is the strongest since the third quarter of 2007, just before the recession began.

More details

In current dollar terms, GDP rose 2.6% to an annual rate of $14.24 trillion.

Final sales, which exclude inventories, increased at a 1.5% annual rate, the most in a year.

Consumer spending rose at a 2.8% annual rate, the biggest gain in more than two years.

Consumer spending added two percentage points to GDP.

Spending on durable goods surged 20.4%, the most in eight years. The government's cash-for-clunkers program boosted auto sales.

Most of the clunker sales came out of inventories, but production of vehicles rebounded smartly after a sharp pullback earlier in the year. Auto production contributed 1.45 percentage points to growth, more than half of the total GDP increase.

Business investments fell at a 5.9% rate, on the heels of having plunged at a record 39.2% annual rate in the first quarter.

While investments in structures dropped 18.4%, investments in equipment and software rose 1.5% -- the first increase since the recession began. Business fixed investment subtracted 0.6 of a percentage point from growth.

Inventories declined by $139.2 billion after a record $160.2 billion drop in the second quarter. The change in inventories added 0.7 of a point to growth.

Investments in housing rose for the first time after 14 consecutive declines, growing at an 18.9% annual rate, as home building was boosted by a tax credit for first-time buyers and by a severe contraction in inventories of new homes. Residential investments added 0.4 of a point to GDP growth.

After collapsing in the first and second quarters, trade recovered. Exports rose 17.8%, the biggest gain in two years. Imports increased 21.3%, the most in 25 years. Net exports subtracted 0.8 percentage points from growth.

Government spending rose at a 2.6% annual pace. Spending by state and local governments fell 0.6%. Federal spending increased 8%, including an 8.4% increase in the volatile defense spending category. Nondefense spending rose at a 7% annual rate.

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